Proposed Rule: Small Business Lending Company (SBLC) (87 FR 66963) 

In its proposed rulemaking on November 7, 2022, SBA put forth three significant changes: lifting the Small Business Lending Company (SBLC) license moratorium, creating a new type of SBLC called a Mission-Based SBLC, and removing the loan authorization requirement. The lifting of the SBLC moratorium, which some Republicans and Democrats called for in legislation introduced last Congress, represents both a significant departure from the past and an uncertain future impact.

What Might Change?

SBLC License Moratorium

While banks and credit unions are the primary providers of 7(a) loans, the Small Business Act permits SBA to authorize other entities to also make government-guaranteed loans. SBA has thus classified certain non-depository lending institutions as SBLCs.

In 1982, SBA established a moratorium on licensing new SBLCs because it did not have sufficient resources to exercise regulatory oversight of additional license holders. Since then, the number of SBLCs has been limited to 14, though these licenses have been transferred from time to time from one institution to another, with SBA approval. The proposed rule would:

• Lift the moratorium on issuing new SBLC licenses. SBA would be able to increase the number of regular SBLCs and add a new type of SBLC, called a Mission-Based SBLC (see below).

SBA expects to license three new SBLCs under this change and that each would make eight 7(a) loans in their first year. That, according to the SBA, could potentially increase to 425 loans per year over four years.

Mission-Based SBLC

To close financing gaps for underserved small businesses, SBA proposes to create a new type of SBLC. The change would:

• Create a new Mission-Based SBLC designation for nonprofit organizations with a mission to fill an identified capital market gap, which may include geographic area, startup businesses, business sector, and demographics.
• Allow Community Advantage lenders to become Mission-Based SBLCs, with permanent participation in 7(a).
• Set unique minimum requirements for each Mission-Based SBLC, based on that entity’s target market, risk tolerance, financing needs, and other factors.

SBA states that it will approve Mission-Based SBLCs according to market conditions and its oversight capacity.

Loan Authorization

Currently, both the 7(a) and 504 programs require lenders to sign and submit a loan authorization document to SBA. The proposed rule would:

• Remove the loan authorization requirement and rely on the terms and conditions of the loan application that lenders also submit.

In proposing this change, SBA states that the current process duplicates efforts and creates opportunities for a “mismatch of information” between the authorization and the loan application that contains terms and conditions.

What They’re Saying

SBLC Moratorium & Mission-Based SBLC

A significant point of contention pertains to regulatory oversight of different lenders. Unlike the majority of 7(a) lenders, which are overseen by federal banking regulators (e.g., the Federal Deposit Insurance Corporation and the National Credit Union Administration, among others), “SBLC’s are regulated, supervised, and examined solely by SBA.” This is somewhat similar to Community Advantage lenders, which are state regulated.

In a December 2022 letter to the chairs and ranking members of the House Small Business Committee and the Senate Small Business and Entrepreneurship Committee, associations representing depository lenders expressed concern that differences in regulatory oversight between their institutions and non-federally regulated lenders could result in “imprudent lending behavior that could lead to risk to both borrowers and the performance of SBA’s 7(a) portfolio.”

Non-federally regulated lenders, on the other hand, stressed that their institutions are not regulated solely by SBA but are also subject to state oversight and numerous federal laws governing commercial lending.viii They also pointed out that SBLCs have participated in the 7(a) program for 40 years without threat to its integrity. In support of the proposed rule, they point to research by the Federal Reserve Bank of New York on the Paycheck Protection Program (PPP), finding that fintech lenders “likely served borrowers who would not have received loans otherwise.”ix Other research, also cited in the letter, found that, beyond PPP, fintech lenders helped expand credit access at lower cost and had better loan performance predictions.x As a result, proponents of the proposed rule argue, fintechs could play a similar role if allowed to participate in 7(a).

Opponents of the proposed rule also point to PPP and evidence, including that documented by the Select Subcommittee on the Coronavirus Crisis, of lending service providers and lenders (specifically a handful of FDIC-regulated banks, non-bank lenders, and CDFIs) for failing to stop “obvious and preventable fraud, leading to the needless loss of taxpayer dollars.”xi In its December 2022 staff report on PPP fraud, the Select Committee recommended that any expansion of the 7(a) program be accompanied with thorough review and ongoing monitoring of new entrants.

Loan Authorization

Some smaller lenders expressed concern during the public comment period that removing the loan authorization requirement would increase the risk of non-compliance with loan terms and jeopardize the government guarantee if certain loan conditions were missed. These commenters tend to make a relatively small number of 7(a) loans and rely on the authorization document for important information.